This thesis presents various dynamic models of corporate decisions
to address two main issues: investment distortions caused by debt
financing and cash flow sensitivities.
In the first chapter, four measures of investment distortion are computed.
First, the effect of financing frictions is examined. The tax
benefit of debt induces firms to increase their debt capacity and to invest
beyond the first-best level on average. The cost of this investment
distortion outweighs the tax benefit of debt. Second, Myers's (1977)
debt overhang problem is examined in a dynamic framework. Debt
overhang obtains on average, but not in low technology states. Third,
there is no debt overhang problem in all technology states when debt
is optimally put in place prior to the investment decision. Finally, the
cost of choosing investment after the debt policy is examined. Equity
claimants lose value by choosing to invest after their debt is optimally
put in place because they do not consider the interaction between their
investment choice and the debt financing conditions.
The second chapter explores the impact of financial constraints on
firms' cash flow sensitivities. In contrast to Fazzari, Hubbard, and Petersen
(1988), cash flow sensitivities are found to be larger, rather than
smaller, for unconstrained firms than for constrained firms. Then, why
is investment sensitive to cash flow? In the two models examined in
the second chapter, the underlying source of investment opportunities
is highly correlated with cash flows. Investment may be sensitive to
cash flow fluctuations simply because cash flows proxy for investment
opportunities. This leaves two important questions. Can this chapter
suggest a better measure of investment opportunities than Tobin's
Q? Not a single measure for both the unconstrained and constrained
firm models. Can this chapter suggest an easily observable measure of
financial constraint? Yes: large and volatile dividend-to-income ratios.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:BVAU.2429/10060 |
| Date | 11 1900 |
| Creators | Moyen, Nathalie |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Relation | UBC Retrospective Theses Digitization Project [http://www.library.ubc.ca/archives/retro_theses/] |
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